As Groupon prepares for its IPO, critics are circling the daily deals site wondering whether it's worth the hefty $25 billion valuation it currently holds. Key to the future of Groupon's success is its ability to woo merchants, with the promise that participating will boost business and draw new customers.
But recent story in TechCrunch highlighted the hesitation that some merchants may feel about getting involved with the site. TechCrunch revisited one merchant who proclaimed that signing up for Groupon was the "single worst business decision" she had made. Her story echoes other merchants who have claimed that Groupons actually result in unprofitability, administrative nightmares, and, to cap it all off, that they don't result in new regular customers.
Jessie Burke, owner of Posies Cafe in Oregon, first told her story in September 2010. According to Burke, Groupon pushed her to offer a deal that would let users buy $13 of product for $6. Groupon originally wanted 100 percent of the money (what it usually takes when consumers pay less than $10 on a deal), but relented, revising their percentage cut of the deal price to 50 percent.
But, though Burke saw an uptick in business, her cafe ended losing close to $10,000 because of the Groupon campaign. Though Groupon had told her that 98 percent of the customers who came in for the deal would spend more than the value of the Groupon, most did not, or if they did, at small amounts closer to 10 cents than to 5 dollars. Burke also noticed that few of the Groupon users became regulars, with many coming from out of town, others trying to redeem multiple deals at once, and some even behaving abusively to staff.
To make matters worse, the Groupon resulted in several administrative nightmares. Tracking 900 deals proved extremely difficult, and ended up in multiple instances of fraud with users redeeming the same Groupon more than once. The deal, scheduled by Groupon, ended up occurring at the same time as another business boosting event, so that huge lines formed out the door, an unideal situation for a cafe.
“What was the saddest part of it for me was that this had had happened to a lot of businesses but because no one had ever said anything we all just assumed (and myself included) we just assumed we were bad business people. That we just didn’t know what we were doing. If everyone loves Groupon so much, we must be wrong," she told TechCrunch.
But Burke is not alone. The Wall Street Journal picked up the story of U.S. Toy Co this January, a family toy store that ended up with 2,800 customers on a retail deal, but ended up losing money on 75 percent of the deals. Like Burke, Groupon took 50 percent of the deal profit, which had offered $20 of toys for $10, leaving U.S. Toy with $5 on each deal. Customers ended up spending less than the normal average per sale. And, owners estimated that 90 percent of the deal users were already regulars--not new customers.
These stories tally up with a few reports that have been released regarding Groupon use and merchant satisfaction. Business Insider reported the findings of entrepreneur Dylan Collins, who studied data from U.K. salon booking software Phorest. Collins determined that only 1 percent of Groupon's customers end up as regulars, but that businesses actually need at least 10 percent to do so for such campaigns to be financially feasible. He also found that only 10 percent of merchants who'd run campaigns had run, or planned to run, future campaigns.
CEO Andrew Mason has said that 97 percent of featured merchants want to run additional campaigns. But yet another study, this one from Rice University surveyed 150 businesses in 19 U.S. cities, and found that this might not be the case. Of those respondents, only 60 percent indicated they would want to run another campaign. Thirty-four percent of them did not make a profit on the deal.
While it might make more sense for certain kinds of businesses (services rather than products) to run Groupons, the high cut taken from each deal, combined with the possibility that customers won't spend more than the deal amount (which businesses would keep all of), and most of all, the failure of such deals to create new customers, presents a problem for Groupon. As the company gets ready to make its IPO, such issues only lend credibility to the chorus of naysayers insisting that Groupon itself is a bad deal.
Are you a merchant that's run a Groupon? Were your experiences positive or negative? Email us at technology[at]huffingtonpost.com to tell us your story.
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